Wednesday, July 18, 2012

So, barring any problems with a medical, Zlatan Ibrahimovic
will today sign for Paris-Saint Germain. Many in the football world have been
shocked by PSG’s audacious €65 million swoop for the Milan duo of Ibrahimovic
and Thiago Silva, but it really should come as no surprise given the club’s
massive transfer outlay ever since it was purchased by Qatar Sports Investments
(QSI) last summer.

In much the same way as Manchester City did when they signed
Robinho after their Abu Dhabi takeover, PSG immediately made a resounding
statement of intent when they shattered the French transfer record with the €42
million purchase of Argentine playmaker Javier Pastore from Palermo. They also
scooped up the cream of French football, buying Ligue
1 leading scorer Kevin Gameiro and powerful midfielder Blaise Matuidi,
while raiding Serie A
for Jérémy Menez (from Roma), Mohamed Sissoko (Juventus) and Salvatore Sirigu
(Palermo), and securing the services of the Uruguayan captain Diego Lugano
(Fenerbahce).

The spending did not stop there, as new manager Carlo Ancelotti
brought in experience in the January transfer window in the shape of Thiago
Motta (from Inter), Maxwell (Barcelona) and Alex (Chelsea). This summer, as
well as Ibra and Silva, PSG have to date also splashed out €26 million for
Napoli’s forward Ezequiel Lavezzi and €12 million for Pescara’s technically
gifted young star Marco Verratti. There’s also talk that Kaká might join the
French revolution.

QSI, an investment arm of Qatar’s sovereign wealth fund
owned by the ruling Al Thani family, bought 70% of PSG from American investment
company Colony Capital in May last year, before acquiring the remaining 30% in
March in a transaction that placed a €100 million value on the entire club.
Right away, they installed Nasser Al-Khelaifi as club president, banking on his
sports experience from his role as director of the TV channel Al Jazeera Sports
and president of the Qatar Tennis Federation.

"We'll meet again"

Al-Khelaifi spoke of his hopes for this sleeping giant,
“It’s a big club with a history and super fans.” Indeed, PSG is only behind
Marseille in terms of popularity in France. The year before, their potential
had been underlined by no less a person than Arsène Wenger, “PSG is the only
club in the world which is based in an area of 10 million inhabitants and
doesn’t have any competition (from a rival club).” With spooky prescience, he
added, “What needs to be done is to get a group of investors around the table
to provide the club with some financial muscle.”

However, there is little doubt that they have been
under-achievers since they were founded in 1970 after the merger of Paris FC
and Stade Saint-Germain. In fact, they have not won the Ligue 1 title for 18 years, though in
fairness they do hold the record for the longest current spell in the
competitive French top flight without being relegated.

To an extent, QSI’s investment is nothing new under the sun
for PSG. With obvious parallels to the current situation, they were bought in
1991 by TV channel Canal+, who proceeded to invest substantial sums in
attracting players of the calibre of David Ginola, George Weah and Rai to
Paris, leading to a glorious few years, when they reached a Champions League
semi-final, two UEFA Cup semi-finals and two Cup Winners’ Cup finals, winning
one of them in 1996 against Rapid Vienna and losing the other in 1997 to
Barcelona.

"Ménez - Jérémy spoke in class today"

However, the club ran up huge losses and built up
substantial debts, leading to the 2006 sale to Colony Capital (plus minority
shareholders Butler Capital Partners, a French investment company, and Morgan
Stanley, an American investment bank). On the plus side, this consortium wiped
out the club’s debts, but against that they appeared more interested in the
property development opportunities at the Parc des Princes stadium and the
training centre at Camp des Loges. The supporters’ dissatisfaction with their
approach was summed up by a banner unfurled at the ground a couple of years
ago: “Colony: a great PSG or get lost.”

Those fans are unlikely to be disgruntled with the ambition
shown by QSI, who have promised to spend €100 million a year for the next five
or six years in order to build a strong team, before slowing down the
investment. Although Al-Khelaifi claimed that this level of expenditure was
“normal for a top-ranking club”, only Manchester City have really done anything
similar for such an extended period.

The idea is “to invest a lot and immediately” with the
objective of joining Europe’s elite. Al-Khelaifi emphasised the European
aspirations, “Obviously everyone dreams of winning the league, but our priority
right from next season is the Champions League.” As part of their five-year
strategy, they hope to compete in the Champions League on a regular basis and
be in a position to win the trophy in three years.

"Ancelotti - Hands off, he's mine"

Although PSG’s official statement on the QSI takeover
included the usual, bland remarks about looking “to take the club to the next
level”, Carlo Ancelotti was in no doubt about the new owners’ targets, “The aim
of the club is very clear. They want to build a team to win in the Champions
League, not just in France.”

Last season, PSG finished second in Ligue 1, which was enough to qualify
them for the Champions League, though it must have been something of a
disappointment for QSI, given last summer’s spending spree. Indeed, when PSG
were leading the title race before Christmas, Al-Khelaifi said, “Given the
league table at present, if PSG are not champions of France at the end of the
season, it will be a failure.”

It must have been particularly galling that they lost out to
Montpellier, a club whose entire annual budget of €33 million is less than the
amount PSG paid for one player (Pastore). It would be small comfort to know
that the French league is one of the most unpredictable around, having five
different champions in the last five seasons.

Moreover, the club had sacked the unfortunate Antoine
Kombouaré to make way for Ancelotti, despite the club stalwart guiding PSG to
the top of the table, though his expensive team had just crashed out of the
Europa League. The feeling was that Ancelotti was the right man to take the
club forward, having won two Champions Leagues and Serie A with Milan plus the Premier
League with Chelsea. In addition, his reputation would help PSG attract the
calibre of player required to make that big jump in quality, though the high
salaries on offer might also help and Paris is not exactly a hardship posting.

Off the pitch, there will be plenty of changes too, as PSG
will rack up enormous losses. In fairness, the club has consistently lost money
in the past few years, though these will pale into insignificance compared to
what is about to hit their books.

In the last published accounts for the 2010/11 season,
before the impact of the QSI takeover is considered, they made a tiny loss of
€201,000, though this was heavily influenced by exceptional financial items of
€27.9 million. These are not explained, though are probably due to movements in
provisions, which was the case in 2009/10.

Excluding this adjustment, PSG’s loss would have been €28.1
million, even higher than the €21.9 million the previous season, which was the
second highest in Ligue 1.
The 2010/11 operating loss was essentially due to €130 million of expenses,
including €70 million of wages, being far higher than the €101 million of
revenue. Profit on player sales and interest payable were negligible.

In the previous five years, PSG’s loss averaged over €14
million a season, while the cumulative losses since 1998 add up to a colossal
€300 million. In those 13 years, PSG have not once reported a profit.

In terms of Ligue
1 profitability, PSG were mid-table in 2010/11, but if the
exceptional items were ignored, their underlying loss was about the same as
Lyon’s €28 million, which was the worst in the league. This was a repeat of the
previous season when Lyon (€35 million) and PSG (€22 million) also reported the
largest losses.

The only other club that reported a double-digit loss in
2010/11 was Marseille with €15 million, while half of the 20 clubs were
profitable. In fact, the total Ligue
1 losses of €46 million were much improved from the previous
season’s €114 million, despite a 3% fall in revenue, as expenses were cut and
profits from player trading increased – partly due to PSG’s purchases.

That’s all very well, but it will be a whole new ball game
under QSI. The club had originally estimated a loss of €40 million for 2011/12,
but this has been revised upwards to €100 million following the signing of new
players, the hiring of new staff including Ancelotti and Kombouaré’s pay-off.

The plan for next season assumes a deficit of €70 million,
based on €130 million revenue and €200 million expenses, comprising €120
million wages (60%), €40 million player amortisation (20%) and €40 million
other expenses (€20 million). This is the first time that any French club’s
budget has gone above €150 million and would mean combined losses over the next
two years of €170 million, though even that may be under-estimated.

This is not a problem for the Direction
Nationale du Contrôle de Gestion (DNCG), the organisation
responsible for monitoring and overseeing the accounts of professional football
clubs in France. In contrast to UEFA’s Financial Fair Play (FFP) regulations,
they allow owners to dig into their pockets to cover shortfalls with their own
funds and they are satisfied with the bank guarantees provided by PSG’s
directors.

The DNCG president, Richard Olivier, explained their view,
“The more famous players there are in L1, the more spectators there will be.
The Qatari are great. They’re putting in €200 million and with them we can hope
to gain the fourth place in UEFA’s coefficients. They’re filling the stadiums
and bring money directly and indirectly.”

"Lavezzi - heading to Paris"

Of course, it’s a very different story with UEFA’s FFP, which
will ultimately exclude from European competitions (Champions League and Europa
League) those clubs that fail to live within their means, i.e. break even. In
particular, clubs will not be allowed to make up for losses via handouts from
the owners. The first season that UEFA will start monitoring clubs’ financials
is 2013/14, but this will take into account losses made in the two preceding
years, namely 2011/12 and 2012/13.

They don’t need to be absolutely perfect, as wealthy owners
will be allowed to absorb aggregate losses (“acceptable deviations”) of €45
million, initially over two years and then over a three-year monitoring period,
as long as they are willing to cover the deficit by making equity
contributions. The maximum permitted loss then falls to €30 million from
2015/16 and will be further reduced from 2018/19 (to an unspecified amount).

In addition, UEFA’s break-even analysis allows clubs to
exclude “good” costs, such as depreciation on fixed assets and expenditure on
youth development and community, while the first year can deduct wages of
players signed before June 2010.

That’s a help, but PSG’s projected losses of €170 million
are clearly far higher than the €45 million allowance, so it looks like they
will have to rely on one of UEFA’s get-out clauses, namely that an improving
trend in the annual break-even results “will be viewed… favourably” (Annex XI).
In this way, they might manage to avoid the ultimate sanction of being thrown
out of the Champions League.

Indeed, while UEFA’s president Michel Platini has said that
he is not a fan of clubs that “buy players left, right and centre”, Andrea
Traverso, his head of licensing, has been more circumspect, “Before we apply
any penalties, we will look at a club’s financial situation in its entirety.”

Nevertheless, Al-Khelaifi is well aware of this issue and
has said that it is QSI’s long-term plan to make PSG into a profitable club,
“In five years we want to make money.” The idea is to invest massively in new
players in the first few years in order to boost the sporting and commercial
potential of the club, so that it is self-sufficient by the time that FFP
really begins to bite.

The impact of QSI’s arrival on the club’s activity in the
transfer market has been dramatic. In the decade before the takeover, PSG’s net
spend was just €27 million, but has been a remarkable €199 million since then.
The director of football (and former PSG player), Leonardo, has said, “We want
to do something long term and not buy ten Messis straight away. That’s not how
you build a team”, but he added that the club was “obliged” to spend big sums
if it wanted to compete at the highest level.

Evidently, they are following the playbook used by Chelsea
and Manchester City, who spent massively in the first two seasons following the
arrival of wealthy benefactors. Ancelotti has argued, “We don’t just want to
spend for the sake of it”, though others might beg to differ, as the initial
policy of buying proven domestic performers seems to have gone by the wayside
in favour of international superstars.

This should lead to a significant competitive imbalance in
France, as PSG have spent significantly more than the rest of Ligue 1 put
together. The “closest” contenders to PSG’s €199 million net transfer spend
since the QSI takeover are Rennes and Marseille, with just €16 million and €11
million respectively.

Not only that, but in that period PSG are the biggest
spenders in Europe, ahead of Abramovich’s Chelsea (€127 million) and a
rejuvenated Juventus (€117 million). No other club has spent more than €100
million in this period. Traditional powerhouses like Bayern Munich and
Manchester United have been left in the shade, while the nouveaux riches clubs
like Manchester City, Anzi Makhachkala and Malaga are also in PSG’s slipstream.

Up until the last accounts, PSG did a reasonably good job
controlling their wage bill with their 2010/11 wages to turnover ratio of 69%
being just within UEFA’s recommended upper limit of 70%. In the last five
years, wages have grown in line with revenue, as both have risen around €20
million since 2006.

In fact, PSG only had the third highest wage bill in France
of €70 million in 2010/11, a long way behind Marseille (€101 million) and Lyon
(€100 million), though more than twice as much as Montpellier (€29 million),
who went on to become champions the next season.

The gap to the leading European clubs was even more striking
before the QSI takeover. The Spanish giants, Barcelona (€241 million) and Real
Madrid (€216 million), had wage bills more than three times as much as PSG,
while even the notoriously parsimonious Arsenal (€149 million) paid out twice
as much. As an example of the impact of major squad investment, Manchester
City’s wage bill has doubled in two years to €209 million.

These huge discrepancies help explain why PSG need to spend
if they have any chance of breaking into this select group, though this will be
even more of a challenge, given the high tax rates in France, which means they
have to pay a higher gross salary than their competitors in other countries to
ensure that the net salary is at the same level.

This is reflected in the salaries paid to the new recruits,
which are as high as €4 million a year, according to a summary published by the
Sportune
website (based on figures collected from Le
Parisien and France
Football) for the 2011/12 season. On top of that, Ancelotti is
reportedly receiving €6 million a year, an unprecedented figure for a coach in
France. The list adds up to €65 million, but that excludes other players,
coaching staff, administration staff, social security and bonus payments, so
the total wage bill was actually much higher.

Although reported figures for transfer fees and player
salaries are notoriously inaccurate, we can still make a reasonable estimate of
the increase in costs arising from the new signings since the 2010/11 accounts.

First of all, we need to understand how football clubs
account for transfer fees. Instead of expensing these completely in the year of
purchase, players are treated as assets, whereby their value is written-off
evenly over the length of their contract via player amortisation. As an
example, Kevin Gameiro was bought for €11 million on a four-year contract, so
the annual amortisation is €2.75 million (€11 million divided by four years).

In this way, the cost of buying players (in accounting
terms) is spread over a number of years, but the table above suggests that the
incremental amortisation is about €53 million. Additional wages amount to €78
million, including €25 million for Ibrahimovic (gross cost for €14 million net
salary), plus social contributions of a further €20 million, so the total
increase in costs should be around €151 million. That enormous figure excludes
bonus payments, so the actual rise will be even higher.

It also does not take into consideration the super tax
proposed by incoming Socialist president, François Hollande, whereby all income
above €1 million would be taxed at 75%, a huge jump from the current 41%. There
is some doubt over whether that would apply to footballers, but if it did come
into force, it would significantly increase the gross costs to a football club
when a player’s contract has been agreed on a net basis. In this case, a French
tax expert calculated that the total cost of Ibrahimovic’s mega contract to the
club, including social security, would be an unbelievable €70 million.

"Come on, Alex, you can do it"

Obviously, some players have left PSG since 2010/11,
including Ludovic Giuly, Gregory Coupet and Claude Makélélé (though he has
remained at the club as assistant manager), but the impact on wages would be
relatively small.

Clearly, there are other costs besides salaries and player
amortisation, but these are by far the most important for a football club, so
even with the caveats outlined above, the calculated €151 million increase
should give us a good idea of the financial challenge facing PSG. If we add
that to the underlying 2010/11 loss of €28 million, we get to a projected loss
of €179 million for PSG in 2012/13, which is a lot higher than the club’s
budgeted loss of €70 million for that season. The only way that could be
reduced is by growing revenue; so let’s explore the possibilities there.

QSI’s plans involve growing revenue from the current €101
million to €130 million in 2012/13 and then to €250 million in 2014/15 – a
substantial increase by anybody’s standards. They have a four-pronged strategy
to turn PSG into a leading global brand: (a) sporting success – reflected in
higher TV revenues from Ligue
1 and the Champions League; (b) gate receipts – higher crowds paying
higher ticket prices; (c) sponsors – a significant increase in the amounts paid
by each sponsor; (d) merchandising – shirt sales off the back of superstars
like Pastore and Ibrahimovic.

PSG’s current revenue of €101 million is the third highest
in France, though it is a fair way behind Marseille (€151 million) and Lyon
(€133 million). On the other hand, it is significantly higher than Lille, the
fourth placed club, whose revenue is €34 million lower. It is again striking
that the 2011/12 champions Montpellier had revenue of just €37 million.

Interestingly, PSG has the lowest reliance on TV with that
category accounting for 44% of the club’s total revenue, though that is partly
due to the lack of Champions League. Against that, they had the highest
proportion from match day (18%) and second highest from commercial (38%), only
behind Monaco.

Although PSG are not mentioned in Deloitte’s annual money
league, their revenue would place them 22nd in the list, just
behind Benfica, and about the same level as Aston Villa. Their stated target of
€250 million would give them the same revenue level as Arsenal and Chelsea,
taking them into the top five, which demonstrates the extent of their ambition
– or, alternatively, how difficult it will be to achieve this goal.

The last season that PSG’s revenue grew substantially was
2008/09, when it rose €28 million from €73 million to €101 million, which was
because of two main reasons: (a) success on the pitch – higher league place and
progress in the UEFA Cup, which resulted in higher TV revenue (aided by a
slightly higher new French TV deal) and gate receipts; (b) different accounting
for Nike merchandising – previously the club had only reported net royalties,
but from 2009 they included gross revenue (around €8 million) with a similar
increase in expenses.

Excluding those factors, annual revenue between 2006 and
2010 averaged around €80 million, though 2011 climbed to €101 million, largely
due to television revenue, arising from Europa League participation and a
higher position in Ligue
1.

The distribution model for French TV money is relatively
equitable with 50% allocated as an equal share, while the remainder is
distributed based on league performance 30% (25% for the current season, 5% for
the last five seasons) and the number of times a team is broadcast 20% (over
the last five seasons). This resulted in €43 million for PSG in 2011/12, €4
million higher than 2010/11, essentially due to finishing higher in the league.

There had been concern that the new four-year TV deal
starting in 2012/13 would be considerably lower than the current deal, as one
of the existing broadcasters, Orange, decided to withdraw from the bidding
process, leaving Canal+ as the only game in town. However, Al Jazeera, whose
director is the very same Al-Khelaifi that is president of PSG, helpfully
stepped into the breach to take some of the packages, while strengthening their
position in French football.

Although this has prevented a financial calamity for many
French clubs, who are very reliant on TV money, it should be noted that the
annual €610 million from the new deal is still lower than the current €668
million, though their president considered this to be “more than satisfactory
in the current economic climate.” That said, Al Jazeera also picked up international
rights for six years for €192 million, which works out to €32 million a year,
nearly 70% higher than the current €19 million – though that is surely still a
bargain, given the stars that are being attracted to PSG.

This is in stark contrast to the Premier League, where the
new three-year domestic deal has increased by an amazing 70% to €1.3 billion a
year, while the overseas rights are currently worth €0.8 billion a year (and
likely to increase). The new French deal means that PSG’s revenue growth
possibilities here are extremely limited for the next four years, leaving their
TV revenue much lower than their competitors abroad.

If we compare PSG’s TV revenue for Ligue 1 of €43 million with the top two
clubs in other major leagues, we can see the problem. Real Madrid and Barcelona
earn nearly €100 million more a season from their lucrative individual deals,
while the Italian clubs generate around twice as much even after their return
to a collective deal. The two Manchester clubs receive €30 million more a year,
while even the club finishing bottom in last season’s Premier League,
Wolverhampton Wanderers, got €6 million more than PSG with €49 million.

Where PSG could grow their revenue is regular participation
in the Champions League. Last season the three French clubs earned an average
of €22 million (Marseille €27 million, Lille €20 million and Lyon €19 million),
compared to PSG’s paltry €2.4 million from the Europa League. The amount earned
is partly due to performance and partly an allocation from the TV pool, where
half is based on progress in the current season’s Champions League and half on
the previous season’s Ligue
1 finishing place (first club 50%, second 35%, third 15%).

Handily for PSG (and other French clubs), the amount paid to
screen the Champions League in France has doubled for the three years from
2012/13, largely thanks to the intervention of (yes, you guessed it) Al Jazeera,
who paid €180 million for that majority of the rights with Canal+ picking up
the rest. This should mean that TV pool money will double from next season, so
PSG can expect to collect around €28 million (and more if they progress beyond
the group stage).

There is also plenty of room for growth in match day income.
Although PSG’s €18 million is not too bad for France, it is miles behind
Europe’s finest, e.g. Real Madrid, Manchester United, Barcelona and Arsenal all
generate more than €100 million. PSG will be looking at many ways to
(partially) close the gap: boost attendances, raise ticket prices and a better
revenue mix (i.e. more premium customers, executive boxes, etc).

The new administration has already made much progress in
attracting more crowds, with the average attendance rising an impressive 50%
last season from 29,300 to 43,000 and many games being sold out. Admittedly,
the previous season had seen a large decline from 35,100 due to former
president Robin Leproux’s anti-hooliganism crackdown, following a number of
incidents culminating in a death of a PSG supporter. This move towards a “broad
family-based audience” initially saw a reduction in the number of attendees,
but has now paid off, though the crowd is more gentrified these days. QSI’s ambitious
target is to increase the number of season tickets to 40,000 from the current
level of around 20,000.

At the same time, PSG will look to increase ticket prices
(20% for the 2012/13 season), even though an analysis of the 2010/11 figures
suggests that they are already the highest in France. There is a limit to how
much the average fan is willing to pay, even when the football on offer is
improving, so it will be imperative for PSG to find clever ways to maximise
revenue from their premium customers. This can contribute a disproportionate
amount of revenue, e.g. Arsenal make 35% of their match day revenue from just
9,000 premium seats at the Emirates stadium.

PSG currently play in the 48,000 capacity Parc des Princes,
owned by the council, though they will have to play two seasons (2013/14 and
2014/15) at the nearby 81,000 Stade de France, as their current stadium needs
to be renovated for Euro 2016. Although the local authorities have stated that
PSG will return to the Parc des Princes for the long-term, there is a belief
that PSG would prefer to build a new stadium, maybe on the same site, in a bid
to emulate the revenue success of clubs like Bayern Munich and Arsenal, though
that would be a longer-term project.

If PSG are going to have any chance of reaching their €250
million revenue target by 2014/15, they are going to have to get most of it
from commercial activities. Although their current revenue of €38 million is
again pretty good for a French club, it is a lot lower than Europe’s leading
clubs with Bayern Munich (€178 million) and Real Madrid (€172 million) earning
nearly five times as much as PSG.

They have hired Jean-Claude Blanc, former club president at
Juventus, as chief operating officer in order to boost commercial revenue. As a
first step, they have terminated the ten-year contract with sports marketing
agency Sportfive, so that they can handle negotiations in-house. The strategy
will essentially be to have fewer partners, who will pay more.

Long-term shirt sponsor Emirates pays €3.5 million a year in
a deal extended to 2014, while Nike reportedly pays €6 million a season. PSG
will look to increase each of these to €15-20 million per annum when they are
up for renewal, which would be in line with the money earned by the big
hitters, e.g. Manchester United receive €25 million from Aon’s shirt
sponsorship and €32 million from Nike’s kit supplier deal.

In a sign of things to come, PSG dropped Winamax, as they do
not pay enough, while they have signed up Qatar National Bank, who are
reportedly paying €2-3 million a season just for a branding presence in the
stadium. Some have speculated that his may be paving the way to them becoming
main shirt sponsors, as their two-year deal ends at the same time as the
Emirates’ contract finishes

Merchandising revenue should also significantly grow,
particularly from shirt sales following the influx of top talent. Indeed,
Al-Khelaifi said that shirt sales increased by 180% last year. That said, the
amount of money earned per shirt is relatively small, so they will have to sell
an awful lot to make a meaningful difference on their revenue. According to
Nike and Adidas, the top selling clubs are Real Madrid and Manchester United –
and even they “only” sell 1.2-1.5 million shirts a year.

Amusingly, the club’s commercial income actually includes a
public subsidy. Although this has been cut from €2.3 million in 2008 to €1.25
million in 2012, many are unhappy that mega-rich PSG should continue to benefit
from this funding.

"Gameiro - we need to talk about Kevin"

One possibility for PSG would be a mega sponsorship deal,
similar to the one Manchester City signed with Etihad for a reported €50
million a year, which included stadium naming rights (even though City do not
actually own their stadium). Here, PSG would have to be careful not to fall
foul of UEFA’s FFP regulations, which specifically outlaw outrageous deals from
“related parties”, so if QSI paid €100 million a season for a super-VIP
executive box, this would be adjusted down to “fair value”.

PSG are also likely to make more money from player sales
(only €2 million in 2010/11), as they will have to move on players that have
lost their place following the new arrivals with candidates including the likes
of Mamadou Sakho, Nenê and Clément Chantôme.

Now that we have reviewed PSG’s revenues and costs in
detail, we can try to project PSG’s loss for 2012/13. Bearing in mind all the
usual health warnings about forecasts never being 100% accurate, this should
give us an indication of whether they are close to their target.

Taking the negligible 2010/11 loss as a starting point, we
make an adjustment to remove the exceptional financial items, giving a “real”
loss of €28 million. As calculated above, the new signings increase costs by
€151 million for wages (including social security) and player
amortisation. This would be offset
by some departures, though given the relatively low salaries paid before the
takeover, this would be a small amount, say a €10 million reduction. We should
include a nominal €10 million for additional bonus payments, though this might
be on the low side.

For revenue, let’s make a few extravagant assumptions.
First, PSG will win Ligue
1, so their revenue will rise to €46 million, which is €7 million
more than they received in 2010/11. They will also reach the quarter-finals of
the Champions League, as Marseille did last year, so will receive €38 million
(after the increase in TV rights), which is €34 million more than the €4
million they received from the Europa League in 2010/11.

Following the growth in attendances and higher ticket prices
plus more attractive Champions League matches, we’ll go for a gutsy 100%
increase in match day revenue, producing an additional €18 million. Similarly,
we’ll assume a 50% increase in commercial income, worth an extra €19 million.
In the long-term, PSG should earn considerably more here, but they are
constrained in the short-term by existing contracts. For good measure, we’ll
assume that they can make €10 million more profit on player sales.

"A whole Motta love"

All of that gives us a projected loss of €92 million, which
is not too far away from PSG’s budgeted €70 million, but this estimate does
include some fairly aggressive assumptions regarding revenue growth. In any
case, it is clear that PSG will have to be very persuasive in their FFP
discussions with UEFA about how their “project” will ultimately deliver more
revenue and help them towards the elusive break-even point.

They would do well to emphasise their investment in PSG’s
academy with so much of France’s football talent coming from the Paris area.
Historically, this has been under-exploited by PSG, but there have been
encouraging signs at both under-19 and under-17 level in recent seasons.

Of course, QSI’s acquisition of PSG is part of a broader
strategy for Qatar to use the riches accrued from their vast reserves of
natural gas to gain more influence on the global stage. Sport is the ultimate
instrument for gaining “soft” power, especially football clubs. Thus, another
Qatari investor has bought the Spanish club Malaga, while the Qatar Foundation
paid a hefty €170 million to be Barcelona’s first ever shirt sponsor.

"Sirigu - back of the net"

There are also strong trading links between France and
Qatar, so it was not exactly out of the ordinary for former president Nicolas
Sarkozy to host a dinner with a member of the ruling Al Thani family, nor to
invite Michel Platini, given the Qatari’s interest in sport, but the aftermath
was positive for all involved, as Platini surprisingly voted for Qatar to host
the 2022 World Cup, while PSG secured their much needed investment. Sarkozy, a
well-known PSG fan, was described by French newspaper Libération as “the Qatari
team’s 12th man”. Incidentally, Platini’s son now works for QSI.

PSG’s plans are very bold, as confirmed by Ancelotti, “I
know PSG are not yet at the top level, but our objective is to reach the level
of Chelsea, Manchester United, Barcelona and Real Madrid.” There is no doubt
that PSG have become what Milan president Silvio Berlusconi described as “ a
strong economic force”, but that is not a guarantee of immediate success. As an
example, QSI need look no further than Manchester City, who took four years to
win the Premier League following their Abu Dhabi takeover.

On a cautionary note, we should remember the old comment
from opposing fans that PSG stands for Pas
Sûr de Gagner. The club can indeed not be sure of winning, not least
financially where it has little room for error in the FFP era, but, if nothing
else, this will certainly be an exciting ride with the new signings bringing
some much needed glamour to French football.

Monday, July 9, 2012

Last week Manchester United fans once again saw their team’s
name plastered over the business pages, as the club announced plans to float on
the New York Stock Exchange (NYSE) via an initial public offering (IPO) that
would raise at least $100 million of capital. This is the latest piece of
financial engineering from the Glazer family, who have tried the patience of
the club’s support ever since they acquired United in 2005 in a highly
leveraged takeover that placed over half a billion pounds of debt on the club’s
balance sheet.

At least the supporters could gain some understanding of the
proposed transaction from the comprehensive Form F-1 filed with the United
States Securities and Exchange Commission, a document that weighed in at nearly
300 pages. For those that do not have the inclination or energy to plough
through this mighty tome, this article will look at what the IPO means in
practice and whether it is likely to succeed. This will entail a review of United’s
prospects, the threats that they face and the impact of the Glazers’ ownership.

"Wayne's World"

Why have the IPO in New York?

Last year United had planned to float in Singapore, but that
was abandoned due to a combination of poor market conditions and difficulties
in attracting demand. At the time the club had emphasised the importance of
Asia to the club’s growth strategy as one of the reasons for launching an IPO
in Singapore, but that no longer seems so important.

However, there are good reasons from the Glazers’
perspective for listing in the United States. They are well known on that side
of the pond as owners of the NFL team the Tampa Bay Buccaneers, as well as
First Allied Corp, which owns and leases shopping centres. American investors
are also more comfortable with the dual-class share structure that the Glazers
want to use, as opposed to the UK, which might seem like the more natural home
for an English football club.

Furthermore, the American business magazine Forbes has
ranked Manchester United as the most valuable football club in the world eight
years in a row, most recently at $2.24 billion. Indeed, the US gives the
Glazers the best chance of attaining a good valuation by positioning the club
there as a global media business rather than a sports franchise.

"The Glazers - dressed to kill"

How much money will be raised?

There have been reports of $100 million (£64 million), but
the reality is that this is only a placeholder for the filing. No details have
been provided for the number of shares, or the price of the shares, so we cannot
calculate the amount of money to be raised yet.

Given that the stated objective is to reduce the club’s debt
(currently £423 million), it is likely to be much more than the nominal $100
million, as there would be little point in making all this effort to reduce
debt by just 15%. There has been speculation that the amount raised will be
$500 million and might even be as high as $1 billion, depending on investors’
appetite for the offering.

The offer price (and implied valuation of the club) will be
critically important to the success or otherwise of the float. If the targeted
valuation is too high, then the offer will fail to get off the ground. Whispers
around the possible Singapore IPO suggested that the board was seeking to raise
£600 million for a 30% stake, which would have valued the club at £2 billion.

At the time Stephen Schechter of the eponymous investment
bank argued, “They are betting they will get a higher valuation in Asia based
on smoke and mirrors rather than facts. I think it’s worth probably half of
what they’re looking for.” His view was supported by the Red Knights, a group
of wealthy fans interested in buying the club, who suggested that the club was
not worth more than £1 billion.

Indeed, there have been press reports that Morgan Stanley
left the syndicate of banks preparing the offer, as they felt that the
valuation the Glazers placed on the club was too rich. The lead book-runner now
is a far smaller bank, Jeffries, who are likely to have pushed a higher
valuation in order to secure the business (in much the same way as some estate
agents do when selling a house).

What will the money be used for?

There had been concerns that the money from an IPO would be
simply passed to the Glazers, potentially to pay off any other loans that they
might have, but the prospectus clearly states, “We intend to use all of our net
proceeds from this offering to reduce our indebtedness.” In other words, they
will replace debt with equity.

Although the club has been making bond buybacks over the
last two years to reduce the debt from the £541 million peak, it still stands
at a thumping great £423 million, so it makes sense to accelerate the process.
The money owed has gone through a number of iterations, the last being a £500
million bond issue in 2010 that replaced the previous bank loans, but the harsh
fact remains that this is unproductive acquisition debt. While clubs like
Chelsea and Manchester City have used their debt to fund the purchase of better
players and Arsenal used theirs to build a new stadium, United’s debt was only
used to enable the Glazers to buy the company.

No dividends will be paid?

The SEC filing states, “We do not currently intend to pay
cash dividends on our Class A ordinary shares for the foreseeable future”,
which, on the face of it, looks like good news, as the club would not benefit
if interest payments on the debt (£43 million in 2011) were simply replaced by
dividend payments.

However, the wording is not exactly unequivocal (“currently
intend”), leaving the Glazers plenty of room to manoeuvre. Indeed, “foreseeable
future” could be as little as 12 months – or after the debt is repaid. On the
other hand, the lack of dividends makes the shares a less attractive
proposition to investors, so it could be argued that this is just cautious
wording.

What is interesting is that holders of the new Class A
shares would receive the same amount of dividends as holders of the Class B
shares (i.e. the Glazer family). Moreover, no dividend would be declared in the
Class A shares without declaring a dividend on the Class B shares, which
potentially benefits the Glazers. Incidentally, the filing notes that a £10
million dividend was distributed to “our principal shareholder”, i.e. the
Glazers, on 25 April 2012, the same date that they repaid a company loan to the
family.

"David Gill - owing pains"

So is this good news for the football club?

Given the pledge to use the IPO proceeds to reduce debt,
this is undoubtedly positive for the club, as it will free up funds to boost
the manager’s firepower, both on transfers and wages. Instead of spare cash
being wasted on interest payments (at a steep 8.5%) and bond buybacks, which in
total cost £71 million in the nine months up to 31 March 2012, instead it could
be used to compete with the likes of Manchester City and Chelsea.

This is an issue on which all sides of United’s support are
in agreement. United’s chief executive David Gill described the share issue as
“beneficial”, while Duncan Drasdo, chief executive of the Manchester United
Supporters’ Trust, responded, “If it turns out that the vast majority of the
proceeds are used to pay off the debt, that is certainly something MUST would
welcome.”

Is this a good time for a flotation?

Adverse economic conditions mean that this is a very poor
market for a flotation. Several high-profile listings such as Graff Diamonds
and Formula 1 have been pulled, while the Facebook debacle has raised probing
questions about valuations. In fact, launching an IPO in these terrible
conditions could be construed as a slightly desperate move, though it might
also be indicative of the owners’ belief that the shares will be over-valued
(Fergie factor, football on the ascendant).

At the very least, this marks a profound change in strategy
from the Glazers, as it is less than two years since they opted for a bond
issue instead of raising capital. That financing was intended to last for seven
years, but they have decided to go through the whole painful, expensive process
once again – for whatever reason. Furthermore, the prospectus notes that a premium
(averaging 8.5%) will have to be paid to redeem the bonds.

"Valencia - with a shout"

How would the IPO impact the Glazers?

The dual share structure will allow the Glazers to retain
control, as they will hold B shares, which will have 10 times the voting power
of the A shares that will be offered to the New York market. This is a classic
case of having your cake and eating it, as the Glazers will (again) use other
people’s money to pay off some (or all) of the debt, while remaining firmly in
control.

This is highlighted on the third page of the prospectus,
which states that the voting power of the B shares will amount to 67%, i.e.
enough to win any special resolutions that require a two-thirds majority. In
other words, new investors will not be able to block any decision made by the
Glazers.

Although United’s corporate structure will increase in
complexity, the bottom line is that the Glazers are still in charge, as noted
in the filing, “Upon completion of this offering, Red Football LLC will remain
our principal shareholder and will continue to be owned and controlled by the
six lineal descendants (five sons and one daughter) of Mr. Malcolm Glazer.”

Moreover, they have even managed to reduce the amount of
information disclosed to investors for five years by classifying the new company,
Manchester United Limited, as an “emerging growth company”.

Incidentally, although this company will be incorporated in
the tax haven of the Cayman Islands, it will still be subject to US federal
income tax, which has a higher statutory rate (35%) than the UK (currently 26%,
falling to 23% in next two years). While it is true that the effective tax rate
may be lower, that is still a high price to pay for moving jurisdiction.

Finally, there is a possibility that the Glazers will be
able to cash in on some of their shares to cover over-allotments. This is
perfectly normal in an IPO, where if demand for the offering is higher than
expected, then the owners will often make additional shares available for sale.

"Tom Cleverley - brand values"

Are the shares attractive to investors?

The attraction to potential investors must be diminished by
the inferior voting rights arising from the dual share structure, though it is
true that other companies have implemented similar arrangements, especially
those in a comparable situation to the Glazers, namely family owned companies
looking to raise money but retain control, such as the Murdochs’ News
Corporation and the Rothermeres’ Daily Mail & General Trust. More recently,
it has been employed by tech companies riding a wave of popularity, e.g. Google
and Facebook.

In addition, the lack of dividends could be a barrier to
some investors, but, again, other companies have done quite well without paying
dividends, most notably Apple, who have only just resumed paying dividends
after a 17-year hiatus.

On the surface, this offer does have a few drawbacks, but
similar doubts were expressed before the 2010 bond issue and that ended up
being twice over-subscribed, so it could yet surprise on the upside.

"Mr. Jones"

Why would investors buy the shares?

In the absence of dividends, most investors buy a company’s
shares for capital growth. That means that for this offering to fly, investors
need to believe that Manchester United have excellent growth prospects, which
we shall explore in the next section.

United are not exactly backwards in coming forwards about
their status in the prospectus, bragging, “We are one of the most popular and
successful sports teams in the world, playing one of the most popular spectator
sports on Earth.” That may be fair comment for a club that has won the
Champions League on three occasions and the Premier League a record-breaking 19
times, but it is followed up with the more cringeworthy belief that they are
“one of the world’s leading brands with a global community of 659 million followers.”

That statistic is a reference to the ludicrous research that
the club published before the Euros to almost universal scorn, where the
definition of “follower” was stretched to the extreme. They are certainly not
fans, nor are they customers (in marketing terms) that are likely to spend
money on the clubs’ numerous products.

In truth, there is no need for United to rely on such
spurious claims, as their financial record is very good, especially for a
football club, with impressive revenue growth meaning that they are highly
profitable (at an operating level) and generate a lot of cash. Not only that,
but there are exciting (but realistic) prospects of more growth to come in the
future from commercial activity and media rights.

In 2010/11 (the last season when clubs reported annual
financial results), United made profits before tax of £30 million, second only
to Newcastle United in the Premier League, though the Geordies’ figures were
boosted by £37 million profit on player sales, thanks to Andy Carroll’s
transfer to Liverpool.

That’s pretty good, but pales into insignificance when
looking at United’s operating cash profits, known as EBITDA (Earnings Before
Interest, Taxation, Depreciation and Amortisation), which were a remarkable
£111 million. That’s more than twice as much as the nearest contender Arsenal
(£48 million). In fact, United’s EBITDA is more than the next five clubs
combined. There’s little sign of the cash machine breaking down, as EBITDA for
the first nine months of 2011/12 was £85 million, up from £82 million the year
before.

The only thing that prevents their bottom line profits being
substantially higher than their rivals is the net interest payment of £43
million, which is considerably higher than the other leading English clubs. The
only other one in double figures is Arsenal, whose £14 million net interest is
only a third of United’s bill.

United’s prowess stems from their imposing revenue of £331
million, which is by far the largest of any English club, being more than £100
million higher than the next highest Arsenal and Chelsea. Moreover, this is the
third best revenue in the world, only surpassed by Real Madrid (£433 million)
and Barcelona (£407 million).

Deloitte’s annual report noted, “Manchester United's
consistent on-pitch success has helped establish it as a continued fixture in
the top three of the Money League, yet in recent years a gap has grown between
themselves and the Spanish giants Real Madrid and Barcelona.” However, the
impact of exchange rate movements should not be ignored, as the weakening of
the Euro in recent months (from 1.11 to 1.25) would have almost halved the
difference between Madrid and United from £102 million to £53 million.

Since 2005 United have virtually doubled their revenue from
£166 million to £331 million. Other top English clubs may have beaten them in
terms of percentage growth, but United’s absolute revenue growth of £165
million is still the largest. Thus, Manchester City have increased revenue by
152% compared to United’s 99% in that period, but the gap between United and
their city rivals has actually widened from £105 million to £178 million.

That’s impressive enough, but the balance of United’s
revenue is equally striking. In 2010/11 each major revenue stream contributed
around a third of the club’s turnover: media £119 million (36%), match day £109
million (33%) and commercial £103 million (31%). This is in marked contrast to
the majority of football clubs who have a dangerous reliance on television
revenue.

United have been second to none when it comes to
successfully monitising their brand – or milking their fans like a cash cow, if
you’re feeling uncharitable. That is highlighted by the great strides made in
the commercial area with revenue rising by nearly 50% in the last two years
from £70 million to £103 million.

Their two largest sponsorship deals are with long-term kit
supplier Nike and shirt sponsor Aon. In 2011 Nike paid a guaranteed minimum of
£25.6 million plus £5.7 million for United’s 50% share of profits from the
club’s merchandising, licensing and retail operations. At current exchange
rates, this kit deal is probably the highest in the world, slightly ahead of
Liverpool’s new Warrior deal £25 million. United receive £20 million a year
until 2014 from Aon for shirt sponsorship, only matched by Standard Chartered
at Liverpool, though the shirt sponsorship element of Manchester City’s Etihad
deal has also been estimated at the same amount.

In addition, United have many secondary sponsors, the
prospectus listing DHL, Chevrolet, Singha, Concha y Toro, Thomas Cook, Hublot,
Turkish Airlines and Epson as global sponsors with Honda and Smirnoff as
examples of regional sponsors. This is an example of the enduring power of the
United brand globally and the club’s ability to attract new partners, despite
the negative headlines arising from the Glazers’ ownership. This is highlighted
by the explosive growth in new media and mobile revenue, which has shot up from
£5 million in 2009 to £17 million in 2011.

Indeed, commercial income has grown a further 17% in the
first nine months of 2011/12 from £77 million to £90 million, including the
amazing DHL deal that sponsors training kit for £10 million a season, a sum
that exceeds the value of all but five of the main shirt sponsorship deals in
the Premier League.

There is still scope for future growth, as can be seen by
the tremendous commercial revenue earned by Barcelona (£141 million), Real
Madrid (£156 million) and especially Bayern Munich (£161 million).
Consequently, in addition to offices in London and Manchester, United have
opened a new office in Asia and are in the process of doing the same in North
America.

They will be looking to secure even higher sums when the
shirt sponsorship and kit deals are up for renewal in 2-3 years time. The bar
has been raised by some of the deals signed elsewhere, particularly City’s
innovative Etihad partnership and the French national team’s deal with Nike,
which is worth €320 million over 7½ years, working out to about £38 million a
year for just a handful of matches. Accordingly, United are in discussions to
extend their deal with Nike, looking for an increase of at least £10 million a
season.

Match day revenue remains a core part of United’s strategy,
though it is probably reaching saturation point, depending on the number of
home games played. That said, £109 million in 2010/11 was by some distance the
highest in England and only beaten by Real Madrid in Europe. Only Arsenal (£93
million) come anywhere close, while United generate 60% more than Chelsea (£68
million) and two and a half times as much as Tottenham (£43 million) and
Liverpool (£40 million).

The prospectus points out that Premier League games have
been sold out at Old Trafford since the 1997/98 season. In 2010/11 home games
were attended by over 2 million fans with each match generating £3.7 million.
One of the main drivers for revenue growth has been deeply unpopular, namely
ticket prices, which have risen by at least 40% under the Glazers’ ownership.
That said, United’s cheapest season tickets actually cost less than those at
Arsenal, Chelsea, Liverpool and Spurs and prices have been frozen for next
season.

"Evans - (Jonny) New Light"

United are in a very good position with Old Trafford’s
76,000 capacity being 16,000 more than the next largest English ground, the
Emirates. Their average attendance of 75,400 is the third highest in Europe,
only behind Borussia Dortmund and Barcelona. Many other leading clubs have
stadium issues, either looking to move to a new ground or expensively refurbish
their existing arena.

However, television remains the largest revenue category for
United at £119 million, mainly comprising £60 million from the Premier League,
£47 million from the Champions League plus £9 million from MUTV. According to
the prospectus, United’s games generated a cumulative audience reach of over 4
billion viewers across 211 countries. Not only that, but industry surveys
suggest that United have the biggest share of the Premier League TV audience,
as confirmed by Kevin Alavy of Future Sports + Entertainment, “United are the
number one club by viewing by a very clear margin.”

Nevertheless, United’s TV revenue will fall for the next two
seasons for a couple of reasons: (a) the earlier exit from the Champions League
at the group stage will cost them around £14 million in 2011/12; (b) finishing
second in the Premier League will reduce the market pool distribution for the
2012/13 Champions League by an estimated £5 million.

That said, the future is bright in terms of TV revenue with
the signing of the £3 billion Premier League deal for domestic rights for the
2014-16 three-year cycle, representing an increase of 64%. If we assume
(conservatively) that overseas rights rise by 40%, that would drive United’s
share up to £94 million, an increase of £34 million a year (using the same
distribution methodology). Of course, other English clubs’ revenue would also
rise, though not by so much in absolute terms, but this would certainly help
United’s ability to compete with overseas clubs, especially Madrid and
Barcelona, who benefit from massive individual deals.

Although United warn in the filing, “There is a risk that
application of the financial fair play initiative could have a material adverse
effect on the performance of our first team and our business”, they later
state, “We already operate within the financial fair play regulations, and as a
result we believe we are in a position to benefit from our strong revenue and
cost control relative to other European clubs and continue to attract some of
the best players in the coming years.”

Under the FFP rules, clubs have to break-even from their
football operations, which strengthens the position of clubs with the most
revenue, such as United. If this IPO does indeed pay off the club’s debt and
remove interest payments, then United will be in a very powerful position – so
long as UEFA do enforce the regulations. The status quo will be entrenched,
while it will be extremely difficult for new clubs to break through the glass
ceiling.

"His name is Rio"

On the other hand, the prospectus does include no fewer than
21 pages of risk factors, though fans should not be overly alarmed, as this is
standard practice under stock exchange regulations, whereby companies have to
inform potential investors of all factors that they should take into
consideration before purchasing shares. This is really a worst case scenario,
as can be seen by the risk of business interruptions due to “natural disasters
and other events beyond our control, such as earthquakes, fires, power
failures, telecommunication losses, terrorist attacks and acts of war.”

Even so, some of these risks are more meaningful than others
with particular attention being paid to the club’s admission that “our indebtedness
could adversely affect our financial health and competitive position.” That’s
hardly surprising, especially as the very fact that the club is launching an
IPO to raise money to pay off indebtedness points to the debt being an issue,
but it is in stark contrast to previous denials from the club’s hierarchy.

In particular, a year ago David Gill told a Commons
committee on football governance that “debt doesn't impact what we do.” He
added, “There has been no impact in terms of our transfers”, while the
prospectus includes a specific risk that debt “could affect our ability to
compete for players.”

Gill has always insisted that funds can be spent on
improving the squad, “The Glazers have retained that money in the bank and it’s
there for Sir Alex if he needs it for players”, but the reality is that since
2005/06 United’s net spend of £68 million (per the Transfer League website) is
only higher than the notoriously frugal Arsenal among top clubs. In the same
period, Manchester City’s net spend is over £400 million, while Chelsea’s is
nearly £300 million. Clearly, United’s net spend is reduced by the Ronaldo
proceeds, but even so that’s a galling comparison, considering United’s revenue
potency.

The threat of City and Chelsea is noted in the filing, “In
the Premier League, recent investment from wealthy team owners has led to teams
with deep financial backing that are able to acquire top players and coaching
staff, which could result in improved performance from those teams in domestic
and European competitions.” Indeed, United have loosened the purse strings in
the last two seasons, splashing out around £50 million last summer to acquire
David De Gea, Phil Jones and Ashley Young, while this summer they have already
bought the exciting Shinji Kagawa from Borussia Dortmund for a reported £17
million.

Nevertheless, a club with United’s financial capacity should
be competing for the very best players, especially as they need to respond to
the competitive threat from teams not afraid to spend. Although last season was
pretty good by most standards, a bit more investment in the squad might have
avoided losing the Premier League to City on goal difference and crashing out
of the Champions League at the group stage.

Although United would probably still have not matched City’s
outlay with Sir Alex Ferguson admitting, “We are not like other clubs who can
spend fortunes”, they should still be spending a lot more than the likes of
Aston Villa, Stoke and Fulham, which has not been the case over the last few
years.

Similarly, United are under pressure to increase their wage
bill of £153 million, as they have now slipped to third in the English wages
league behind Manchester City (£174 million) and Chelsea (£168 million). In
2008, United’s wage bill was £67 million higher than City’s, but it is now £21
million lower, a turnaround of £88 million in just three years.

As noted in the prospectus, “Our success depends on our
ability to attract and retain the highest quality players and coaching staff.
As a result, we are obliged to pay salaries generally comparable to our main
competitors in England and Europe.” By this token, United are a fair way behind
Barcelona and Real Madrid, which helps explain the 10% rise in the wage bill
for the first nine months of 2011/12.

If all the debt is paid off after the IPO, the £45 million
saving could theoretically be added to the wage bill, which would close that
gap and allow United to challenge for the top talents in the game.

In fairness, United have not done too badly under the
Glazers, winning the Premier League four times and the Champions League once,
though much of that is down to the brilliance of Ferguson. It is doubtful
whether any other manager in the modern era could have papered over the cracks
and achieved so much with such a limited budget. The question is whether this
success can be maintained once the great Scot finally leaves. As the prospectus
drily puts it, “Any successor to our current manager may not be as successful
as our current manager.”

This is another reason why the IPO is important, as it is
doubtful whether a manager of the calibre of, say, Jose Mourinho would be
tempted if he had to operate with one hand tied behind his back (from a
financial perspective), when there are plenty of other clubs that are willing
to give elite managers carte blanche.

To give some idea of the constraints faced by Ferguson, we
only need to look at the club’s cash flow statement. Since 2009 United have
generated a very healthy £353 million operating cash flow, but have spent the
vast majority on interest payments and paying off loans and bonds. In that
period they have used 77% of their expenditure on these financial costs with
only 12% (£45 million) on player purchases.

As an aside, cash flow for the nine months up to 31 March
2012 is a large negative £125 million, partly recognising higher expenditure on
transfers, but mainly due to working capital movements of minus £71 million,
which are described as being down to timing, e.g. receipts from sponsors,
season tickets and hospitality). This may well be the case: for the same period
the previous year, working capital movements were also negative (minus £41
million), but ended up as positive £14 million for the full year. However, it
does go to show that United’s cash flow is under pressure in the current
business model if they pay interest AND buy players.

The money wasted in the Glazers’ reign is now estimated at
£553 million, comprising £295 million interest payments, £128 million debt
repayments, £101 million for various bits of financial reengineering (fees for
takeover, refinancing, interest swap termination, bond issue and IPO) and £29
million payments to the Glazer family via consultancy fees and dividends.

In the last nine months alone, they have thrown away £79
million: interest £43 million, bond buybacks £28 million, IPO professional fees
£5 million and £3 million consultancy fees, not to mention £10 million
dividends to the Glazer family to repay loans taken out previously.

Although the exact figure is open to debate, there is no
doubt that United have wasted around half a billion pounds that could have been
spent on the football club, purely for the dubious pleasure of having the
Glazers as owners. Those funds could have been used much more progressively,
with the following examples given by MUST: “Cheaper tickets for loyal fans,
investing massively in the squad and stadium, developing and retaining the best
youth players, competing on an equal basis with the very best teams in Europe.”
Perhaps the worst thing is that even after all that money has disappeared into
the financial ether, United have made little impression on the club’s debt
mountain, which still stands at £423 million.

Obviously, if the club had remained a PLC, then it would
have had to pay out dividends and the current structure also produces tax
savings, as interest expenses are tax deductible, but the net impact of the
Glazers’ ownership is surely still hugely negative. The respected financial
analyst, Andy Green, an acknowledged expert on United’s finances, has estimated
the tax savings at around £110 million and the dividends not paid as £70
million. Deducting that £180 million from the costs of £553 million would give
net costs of £373 million.

"Kagawa - hold on, I'm coming"

Furthermore, the comparison is not just with the PLC, as it
is not beyond the realms of possibility that United could have been bought by a
benefactor like Sheikh Mansour or Roman Abramovich, who have pumped money into
their clubs via capital injections or interest-free loans.

There is no doubt that United’s commercial business has
thrived under the Glazers’ guidance, but, again, other owners with the
slightest business acumen would surely have done much the same with a brand as
wonderful as that described in the IPO prospectus.

Some have suggested that this IPO is the first step in the
Glazers’ exit from the club, but it has been reported that the owners have
already rebuffed several expression
of interest with the board stating, “The owners remain fully committed
to their long-term ownership of the club. Manchester United is not for sale and
the owners will not entertain any offers.”

Even so, Manchester United non-executive director Michael
Edelson said, “It is inevitable that at some time they will sell”, though he
added, “That will be a long way down the line.” Clearly, everything has its
price and investors that employ the LBO model usually sell when they feel that
they have maximized value, so that could be any time.

"Here comes the knight"

Therein lies one of the dangers of this IPO, as the share
price might fall after the float, which would wipe millions of pounds off the
implied value of the club, further delaying the day when the Glazers exit stage
left.

At least the owners have now accepted what almost everybody
else has been saying for ages, namely that the debt is holding back United and
needs to be cleared as soon as possible, though it’s a shame for United fans
that it cost the club so much before the Glazers woke up to this fact.

Supporters of other clubs will be more
conflicted: while abhorring the impact of the likes of the Glazers on the game
in general, they will be quietly relieved that the money paid to financial
institutions did not go towards improving Ferguson’s team, as United have not
done too badly without it. It is by no means guaranteed that the change in
financing strategy will lead to more money being spent on strengthening the
squad, but United fans will be excited at the prospect, imagining what they
might achieve with all that extra cash.

Praise for The Swiss Ramble

"Blogger of the Year 2013 - It’s testament to the effect that Kieron has had on the blogosphere that so many fans take his word as gospel. Putting to use his career in the world of finance, his insights into balance sheets and simple explanations of complex ideas appeal to the hardcore financial whizz and casual fan alike." - The Football Supporters' Federation